Tangible Book Value
When a company's assets are less than its liabilities, the intangible assets are termed as its tangible book value or TBV. Unlike tangible assets, which are easier to evaluate, intangible assets comprise non-physical elements. The foundation of the tangible book value method is that should a firm be wound up, its common shareholders will get paid a sum equal to its tangible book value once most of its tangible assets have been liquidated. Even though they have value, intangible assets like goodwill, patents, and trademarks cannot be sold for cash immediately, so they are not included in the liquidation process.
TBV does not include intangible assets like trademarks, goodwill, and patents; it solely considers tangible assets like buildings, machinery, and equipment.
TBV analysis
Investors frequently use TBV to assess a company's stability and financial health. A corporation with a high TBV has a solid asset base and is unlikely to experience financial troubles. Conversely, a low TBV can indicate that a business relies on intangible assets, which are more challenging to value and would offer less protection in a downturn.
Businesses in the manufacturing, real estate, and mining sectors have significant TBV. For example, since infrastructure and equipment comprise most of their assets, mining companies usually have high TBV.
On the other hand, businesses with minimal physical assets, like those in the software and technology industries, usually have low TBV. Companies with low TBV include Facebook and Google, whose main assets are intangibles like software, patents, and trademarks.
This tells us that TBV differs significantly by industry. Hence, when utilising TBV as a valuation metric, investors should consider the company's industry.
It is noteworthy that although TBV may serve as a valuable measure in specific sectors, it could not be the most accurate representation of a firm's total worth. A company's value should also be assessed considering other variables, including market share, profit margins, and revenue growth. Furthermore, since the market may have already factored in the value of their assets, businesses with high TBV may sometimes be better investments than those with low TBV.
Investors should utilise TBV and other valuation criteria to ensure they make well-informed investment selections.
How do you calculate tangible book value?
TBV calculation is quite simple:
TBV = Total Assets - (Total Liabilities + Intangible Assets)
Let’s calculate the TBV with the following balance sheet data:
- Total Assets = $200 million
- Goodwill and Intangible Assets = $25 million
- Total Liabilities = $30 million
Therefore, TBV = $200 - ( $25 + $30) = $145
The liquidation value of tangible assets is seldom precisely equal to the value recorded in the books, and certain intangible assets can still be sold; therefore, TBV is still only an estimate rather than the actual value of a liquidated company.
Let's use a real-world example to illustrate this calculation:
In 2020, Apple's balance sheet showed the following data:
- Total Assets: $323.888 billion
- Goodwill and Intangible Assets: $3.976 billion
- Total Liabilities: $258.549 billion
Using these figures, we can calculate Apple's TBV as follows:
TBV = $323.888 billion - ($3.976 billion + $258.549 billion)
TBV = $323.888 billion - $262.525 billion
TBV = $61.363 billion
So, Apple's Tangible Book Value in 2020 was approximately $61.363 billion.
It's important to note that the liquidation value of tangible assets is rarely exactly equal to the value recorded in the books. Some intangible assets can still be sold, so TBV is an estimate rather than the exact value of a liquidated company.
Importance of TBV
By applying return-on-investment metrics, the investor analyst can ascertain whether the company can provide investors with a reasonable return on their investment. Analysts can evaluate the value of a joint stock share by using metrics related to return on investment. One way to calculate return on investment is to measure a company's tangible book value.
As TBV estimates a company's liquidation value, which can help evaluate its financial health, it is crucial for both businesses and investors.
Companies in sectors like manufacturing and real estate, where tangible assets make up most of a company's worth, should pay special attention to TBV.
Since TBV estimates a company's liquidation value, which may be more than the current market value, it can be essential for investors to spot undervalued companies.
Moreover, TBV can serve as a gauge of a business's monetary soundness. A corporation with a high TBV has a solid asset basis and is unlikely to experience financial troubles. Investors may find this comforting, making it easier for companies to get loans or other financing.
Learn more: What is Inkle Stack?
Conclusion
As was previously indicated, a company's liabilities and intangible assets are deducted from its overall total assets to get its TBV. Remember that TBV is not the same as book value or market value. Book value is the amount a company's assets are worth, as stated on its balance sheet, whereas market value is the price at which a company's shares are currently trading.
One method of raising TBV is increasing the value of tangible assets. Purchasing new machinery, real estate, and inventories can help achieve this. Deb repayment and cost-cutting measures can decrease liabilities and increase TBV. Higher profits can also aid TBV by raising the company's cash reserves.
Additionally, increasing operational effectiveness may benefit TBV as well. Businesses may boost production and profitability by cutting waste and simplifying procedures. Process changes, training initiatives, and adopting new technologies can all help achieve this.
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